Economic Stimulation: The History and Hope of Coffee in Development
| Author | Seth W. Shannon |
| Position | J.D. Candidate, The University of Iowa College of Law, May 2009. |
| Pages | 02 |
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I believe humans get a lot done, not because we're smart, but because we have thumbs so we can make coffee. 1
Coffee is a relatively simple product by U.S. standards. It is served in every restaurant and kept on hand in most households.2 However, while coffee is relatively cheap, available, and convenient, it is also highly valuable. The number and frequency of people insisting on a cup of coffee in the morning or relying on starbucks to get them through the day is evidence of coffee's worth. Yet, coffee is valuable in a much more substantial way. Farmers in the poorest parts of the world-Africa, Latin America, and Southeast Asia-depend on coffee for their livelihood.3 At least twenty-five million families in these areas depend on the coffee industry to survive.4Additionally, coffee is the second most profitable5 and internationally traded6commodity behind oil. This unique relationship between the size of the coffee industry and the fact that some of the world's poorest populations work in that industry makes it a valuable tool for economic development. Another critical factor in coffee's role in economic development is that the world's wealthiest nations, specifically Japan, the European union, and the united States, consume most of the world's coffee.7 The United States alone consumes 20 percent of the world's coffee.8 Examining the coffee market thus provides an extremely relevant opportunity to bring meaningful development to some of the world's neediest communities. Page 171
Due to the size of the coffee industry in the producing countries,9 it is able to develop those economies through its significant use of labor, attraction of foreign investment, development of infrastructure, and encouragement of general industrial growth.10 Development of these countries also would bring benefits beyond those their individual economies experienced. As these economies develop, they would be able to buy more U.S. exports.11Additionally, citizens would be less likely to resort to terrorism and drugs.12Immigration would be likely to stabilize.13 The significant role the coffee industry played in bringing about the abolition of slavery in Brazil demonstrated its social usefulness.14
This Note will analyze the situation of the coffee industry relating to economic development and, based on that analysis, make suggestions for how relevant parties can better utilize coffee to promote economic development. An examination of the state of the coffee industry is complex, beginning with the economics unique to coffee. This Note will also discuss the relevant history of the coffee industry, specifically relating to the International Coffee Agreements. This history has brought about the current market as well as the burdens it places on producers. The presence of the Fair Trade movement highlights the need for action regarding the coffee market. Furthermore, the Fair Trade movement is relevant to an analysis of coffee and economic development. This Note will explore the significance of the Fair Trade movement in this context. This Note will then address how the United States has responded to the challenges of the coffee market. Finally, this Note will offer suggestions, based on this background, of how to use coffee as an economic stimulant. Page 172
Understanding the economic characteristics of coffee is essential to comprehend its use in development. The way that farmers grow coffee is intertwined with the economic characteristics. The coffee tree bears coffee berries perennially but does not begin producing for three or four years after planting and is not fully productive until five or six years later.15 Thus, the expense of clearing land and planting trees, which takes at least three years to provide a return, prevents farmers from capitalizing on high coffee prices in the short term. 16 When coffee prices rise enough that farmers believe planting more trees is worthwhile, the intended result of more coffee being produced is not immediately apparent. By the time the farmers are able to produce more coffee, the price may have dropped.17 This production lag creates a significant dependency on stockpiling.18 These characteristics of the coffee tree also create barriers to exiting the market because the minimal benefit derived from continued harvesting is typically greater than the cost of uprooting the trees and finding another livelihood.19
Therefore, the elasticity of the supply of coffee is low, meaning the production does not significantly change even if the market price changes.20In the countries that depend on coffee and where most of the growing is done on small farms, the supply of coffee is particularly inelastic; that is, production is particularly likely to remain steady even if the price change is substantial.21
At the same time, consumers, particularly American consumers, are reluctant to change their coffee consumption habits even if the price changes.22 However, consumers are isolated from severe price drops, and the cost of a pound of beans is relatively constant compared to the cost at which coffee is produced and traded.23 This problem of price variability has intensified today as new producers enter the market and increase the supply. Despite the influx of gourmet coffee and coffee shops, the short-term demand Page 173 for coffee over the past thirty years has decreased.24 Therefore, without a comparable growth in demand,25 the increase in supply has resulted in a drop in price for the producers.26 In 1962, the per capita consumption in the United States was 3.12 cups a day, but it dropped to 1.87 cups in 199 3.27 The rate of consumption continued to drop to 1.18 cups per day by 2003.28
Coffee, much like other agricultural products, cannot react to price fluctuations in the short term.29 When prices decrease, producers often do not reduce production because of the fixed and variable costs associated with doing so.30 Even if there is a dramatic drop in prices relative to the cost of production, producers are unlikely to reduce production. 31 Producers can increase production and take advantage of long periods of high prices, but to capitalize on immediate price increases, they must rely on previously accumulated stockpiles. 32
The history of the coffee market greatly influenced its current structure as well. After World War II, African and Latin American countries other than Brazil increased production, and the demand for coffee increased in Europe.33Producers responded by increasing the supply of coffee.34 The governments of producing countries attempted to protect themselves from price declines due to oversupply by limiting their exports, but this resulted in massive stockpiles.35 Page 174
The continued rise in demand and low elasticity in the coffee trade eventually resulted in increased supply and a drop in price.36 Producing countries sought an agreement with the consuming countries to stabilize prices.37 The United States initially rejected any agreement that would establish prices because it would be contrary to free market ideology.38However, the United States eventually consented when it seemed that Latin American countries might resort to communism if the market continued to treat them unfavorably. 39 Importers also feared that economic disruption would lead to difficulties in obtaining an adequate supply.40 These factors led to the creation of the International Coffee Agreement (ICA). The goal of the ICA was to avoid extreme price and supply fluctuations.41 The primary method of trying to reach these goals was through export regulations.42
Beginning in 1962, the original ICA had a duration of five years.43 The 1962 ICA established six objectives: (1) to create "a reasonable balance" for supply and demand in order to provide an "adequate" supply to consumers and a market for producers "at equitable prices"; (2) "to alleviate the serious hardship" to both producers and consumers that resulted from extreme price fluctuations; (3) to help the development of countries "thereby helping to bring about fair wages, higher living standards, and better working conditions"; (4) to maintain prices and increase consumption to increase the purchasing power of producing nations; (5) to encourage coffee consumption; and finally, (6) to generally "further international co-operation in connexion [sic] with world coffee problems."44
To meet these objectives, the 1962 ICA set export quotas to ensure that prices would not drop below the 1962 price. 45 These quotas were based on the producing country's historical share of world exports.46 Countries with low Page 175 per capita consumption and considerable potential for expansion were exempted from limitations.47
The ICA created the International Coffee Organization (ICO) to administer and supervise the agreement.48 The ICO is the "highest authority" and includes all signatories of the ICA.49 The ICA gave both exporting and importing members equal power within the ICO by assigning each group 1000 votes.50 The ICA distributed votes to individual countries according to the proportional export or import volume of coffee of each participating country.51 The basic structure of...
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